We use cookies to customise content for your subscription and for analytics.If you continue to browse Lexology, we will assume that you are happy to receive all our cookies. For further information please read our Cookie Policy.

California employers have long been subject to unusually strict limitations on covenants-not-to-compete. Section 16600 of the California Business and Professions Code ("§ 16600") provides that "[e]xcept in the context of the sale of goodwill, ownership interests, and/or assets of a business, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." California courts consistently have interpreted this provision as barring any covenant that prohibits a person from working for competitors or in a particular industry or profession. On the other hand, most states, including those with statutes very similar in language to § 16600, do not prohibit all such covenants. Rather, those states permit covenants that meet certain standards of reasonableness—for example, in temporal and geographic scope and in how they protect legitimate business interests.

States other than California typically are even more lenient when assessing the enforceability of so-called "non-solicitation covenants," which prohibit a person from soliciting her former employer's customers. Such covenants do not prohibit a person from plying her trade, but merely narrow the customer base she can target when doing so. Most lower state courts in California have prohibited non-solicitation covenants under California law, again regardless of how narrowly and reasonably they are crafted. On the other hand, federal courts in the Ninth Circuit, as well as a tiny minority of California state courts, have held that § 16600 does not prohibit non-solicitation covenants despite the statute's unyielding prohibition on covenants that prevent a person from competing entirely in a particular business or profession. With those few decisions, some California employers saw an opportunity to protect their business interests through carefully drafted non-solicitation covenants that are reasonably limited in time and geographic scope.

In Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (Aug. 7, 2008), the Supreme Court of California foreclosed that opportunity by finding unenforceable in California most non-solicitation covenants that would pass muster in other states. The Edwards Court addressed the enforceability under California law of covenants that prohibited plaintiff "for an 18-month period [after termination of employment], from performing professional services of the type he had provided while at Andersen, for any client on whose account he had worked during 18 months prior to his termination . . . [and] for a year after termination, from 'soliciting,' defined by the agreement as providing professional services to any client of Andersen's Los Angeles office." The Court in short shrift held that the provisions were invalid under § 16600 because they restrained plaintiff's "ability to practice his profession," even though in very limited ways that might satisfy the law in other states. The Court quickly dispensed with the rationale that a few courts in California had applied to hold to the contrary.

It is important to note that the California Supreme Court in Edwards did not explicitly render invalid every non-solicitation covenant. California courts have, in the past, allowed non-solicitation covenants when they protect customer information that is genuinely confidential, proprietary, and/or a trade secret. The Supreme Court in Edwards did not discuss this so-called "trade secret exception" to the general rule prohibiting covenants-not-to-compete, but did cite with approval to the California appellate court decision in Thompson v. Impaxx, Inc., 113 Cal. App. 4th 1425 (2003) that expressly recognized such exception. In addition, as the appellate court in Edwards noted, the California Supreme Court has, in the past, recognized the trade secret exception. 142 Cal. App. 4th 603, 615. Accordingly, non-solicitation covenants expressly tied to trade secrets or other proprietary information will fare better under California law as long as they are carefully crafted within the strictures of that exception. It should also be noted that the covenants in the contract at issue in Edwards included a prohibition on soliciting Andersen's employees. The plaintiff did not challenge that provision, and California courts have on occasion, but not always, enforced such anti-raiding provisions. E.g.,Loral Corp. v. Moyes, 174 Cal. App. 3d 268 (1985).

In light of Edwards, California employers should review any agreements with employees that contain any type of covenant-not-to-compete, and in particular non-solicitation covenants.